The American Tax Payer Relief Act of 2012 increased the 2015 exemption from estate taxes up to $5.43 million per person. However, some married couples may have combined estates that are greater than this amount leading to potential estate taxes after the second spouse dies. This problem may be solved using a key provision in the act – known as portability. As discussed in a Forbes article titled “Estate Planning for the 99 Percent”, using portability allows a married couple to protect up to a $10.86 million dollar combined estate.
How does it work?
After the passing of the first spouse, the surviving spouse is able to carry over what is left of their tax exemption. This is referred to as the “deceased spouse unused exclusion amount.” So, if for example, the first spouse had $2 million in their own personal assets that did not go to their spouse but to other heirs, then the remaining $3.43 million exemption transfers to the surviving spouse – allowing $8.86 million to be used to avoid estate taxes. Oftentimes, nothing will pass to the heirs until both spouses are deceased (there are no estate taxes on assets passed to your spouse). In this instance the entire estate can be protected up to the full $10.86 million.
Unfortunately, portability is not automatically given to every estate. The executor of the first spouse’s estate must “elect portability.” This means they have to file an estate tax return – even if no taxes are due after the death. This must be done within nine months of death or the unused exemption is lost.
Can portability replace a trust?
Before this change in law, trusts were used to avoid estate taxes. While portability allows spouses to eliminate or at least minimize estate taxes, it cannot replace all the benefits of a trust. Trusts can protect an estate from creditors, avoid probate court and protect the exemption if the surviving spouse remarries.
It is important to meet with a qualified elder law attorney to discuss your estate plan. Trusts are a good way to protect assets, but they require careful attention to the re-titling of assets into the trust. No matter which type of estate plan is best for you, an elder law attorney can ensure that it is successful.